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NEW DELHI: The next big event risk before equity investors across the globe, including those of India, is the 'Brexit' referendum.
The United Kingdom will hold the referendum on June 23 to decide whether Britain should stay with the EU or not. Some analysts say this would be the most important global event this year.
A 'Leave' mandate can hold profound implications for various economies in Europe and for countries with which Europe shares deeper trade relations. However, a 'Remain' vote will keep things steady and boost risk-on sentiment.
Although recent polls indicated that the wind was shifting in favour of a 'Remain' vote, it's still too close a call.
From India's point of view, Brexit is important because besides sharing trade relations, EU is India's largest single export market. With a population of around half a billion, the European economy is worth $16 trillion, which is equivalent to one-fourth of global GDP.
Data with the Commerce and Industry Ministry shows India's bilateral trade with Britain stood at $14.02 billion in 2015-16, out of which $8.83 billion was in exports and $5.19 was in imports. The trade balance thus was a positive $3.64 billion.
Exports to the UK presently account for 0.7 per cent of Asian countries' GDP. Some studies estimated that a Brexit would reduce British imports by 25 per cent worldwide within two years.
Only a few economies in Asia would see a noticeable effect on growth. China's exports to the U.K. are equivalent to just 0.5 per cent of Chinese GDP. London-based Capital Economics says a Brexit would cause at the most a GDP drop of 0.2 per cent across Asia.
No risk analysis can precisely estimate the exact consequences should the British decide to part ways with the EU. But the impact will surely be deeper across financial markets, be it equities, currencies or bonds.
Currencies: Pound can tumble 12%, Rupee to weaken
The health of an economy directly reflects on the state of its currency. A possible Brexit could be grave for the British economy, which is estimated to shrink 6 per cent in about 15 years. "The country's GDP could well decline by 3.6 per cent after two years, inflation (CPI) can be higher by 2.3 per cent than the current levels, unemployment rate can increase by 160 basis points, average real wages can contract by 2.8 per cent, house prices can deflate by 10 per cent and pound can tumble by 12 per cent," IIFL said in a report.
In the short run, it could trigger flight of capital from Britain, which could strengthen the dollar in the short term. A strong dollar would push the rupee towards 70 level, experts said.
"We are going to see a lot of volatility in the pound as well as for the euro, and possibly that will create greater demand for safe haven currencies -- the yen and the dollar - making them appreciate against the wider basket," Aditi Nayar, Senior Economist, ICRA, said in an interview with ET Now.
"Given that, the emerging markets currencies would come under some pressure and the rupee is not going to escape that volatility," she said.
"We have a broad range for the rupee for the year between 66.5 and 69.5 levels to the dollar," Nayar said.
The British exit will impact exports to Europe, which will get affected also due to a devaluation of the euro and the pound.
Companies like Tata Motors, Tata Steel, Hindalco and a host of Indian pharma companies will also get impacted due to major currency fluctuations.
Equity markets:
India is not decoupled from the rest of the globe and there will be collateral damage should a Brexit verdict triggers a selloff in emerging markets, which India is part of. The event would lead to a change in strategy for most money managers, shifting their preference from equity towards safe havens such as gold.
The intensity of the damage because of a possible Brexit could be high, but it will not be permanent. Most analysts expect a maximum of kneejerk reaction in the domestic market after which investors will return to the market once the dust settles.
"If there is a Brexit, risk-off trade will kick in, especially because of currency volatility. A risk-off trade may lead to some money going out of emerging markets, including India," said Sashi Krishnan, Chief Investment Officer, Birla Sun Life Insurance.
A weaker rupee can further erode returns for the foreign investors, making them to cash out of the domestic market.
"I would think going into the vote, people are reducing their exposure to emerging markets, but I think a lot of these fears will sort of even out after the event," he added.
Krishnan said any correction because of Brexit will be an opportunity to take exposure in domestic equities, especially the cyclical or consumption-related stocks.
Fund outflow is a risk:
Brexit will lead to capital outflows from India to a certain extent, said experts. Will that entirely damage the India story? No.
"A Brexit will also impact capital flows to India and our exports to Europe will get affected due to a weaker euro and pound. Indian business houses have a material presence in both UK and Europe, and they will see substantial impact due to unavoidable currency fluctuations," said Nirdosh Gaur, MD & CEO, Moneypalm.
Akash Prakash, CEO & MD, Amansa Capital said the biggest worry from a Brexit vote would be that it can open a real can of worms, raising a question mark over hoe the European Union will function in its new avatar.
"I think the real worry on Brexit is not so much about the impact on the UK, which is of course there, but is it about the possible beginning of disintegration of Europe, which is a much bigger worry," he added.
A 'Leave' vote would complicate matters for regional policymakers already wrestling with the euro zone's economic crisis. "These concerns are not limited to retail players as net redemptions from Europe equity funds YTD are now evenly split between retail and institutional investors," the report said.
The second week of June saw EPFR Global-tracked equity funds post a collective outflow of $3.6 billion while bond funds experienced net redemptions for the first time quarter to date. Over $22 billion flowed out of the money market funds, with the bulk getting redeemed on June 15.
The United Kingdom will hold the referendum on June 23 to decide whether Britain should stay with the EU or not. Some analysts say this would be the most important global event this year.
A 'Leave' mandate can hold profound implications for various economies in Europe and for countries with which Europe shares deeper trade relations. However, a 'Remain' vote will keep things steady and boost risk-on sentiment.
Although recent polls indicated that the wind was shifting in favour of a 'Remain' vote, it's still too close a call.
From India's point of view, Brexit is important because besides sharing trade relations, EU is India's largest single export market. With a population of around half a billion, the European economy is worth $16 trillion, which is equivalent to one-fourth of global GDP.
Data with the Commerce and Industry Ministry shows India's bilateral trade with Britain stood at $14.02 billion in 2015-16, out of which $8.83 billion was in exports and $5.19 was in imports. The trade balance thus was a positive $3.64 billion.
Exports to the UK presently account for 0.7 per cent of Asian countries' GDP. Some studies estimated that a Brexit would reduce British imports by 25 per cent worldwide within two years.
Only a few economies in Asia would see a noticeable effect on growth. China's exports to the U.K. are equivalent to just 0.5 per cent of Chinese GDP. London-based Capital Economics says a Brexit would cause at the most a GDP drop of 0.2 per cent across Asia.
No risk analysis can precisely estimate the exact consequences should the British decide to part ways with the EU. But the impact will surely be deeper across financial markets, be it equities, currencies or bonds.
Currencies: Pound can tumble 12%, Rupee to weaken
The health of an economy directly reflects on the state of its currency. A possible Brexit could be grave for the British economy, which is estimated to shrink 6 per cent in about 15 years. "The country's GDP could well decline by 3.6 per cent after two years, inflation (CPI) can be higher by 2.3 per cent than the current levels, unemployment rate can increase by 160 basis points, average real wages can contract by 2.8 per cent, house prices can deflate by 10 per cent and pound can tumble by 12 per cent," IIFL said in a report.
In the short run, it could trigger flight of capital from Britain, which could strengthen the dollar in the short term. A strong dollar would push the rupee towards 70 level, experts said.
"We are going to see a lot of volatility in the pound as well as for the euro, and possibly that will create greater demand for safe haven currencies -- the yen and the dollar - making them appreciate against the wider basket," Aditi Nayar, Senior Economist, ICRA, said in an interview with ET Now.
"Given that, the emerging markets currencies would come under some pressure and the rupee is not going to escape that volatility," she said.
"We have a broad range for the rupee for the year between 66.5 and 69.5 levels to the dollar," Nayar said.
The British exit will impact exports to Europe, which will get affected also due to a devaluation of the euro and the pound.
Companies like Tata Motors, Tata Steel, Hindalco and a host of Indian pharma companies will also get impacted due to major currency fluctuations.
Equity markets:
India is not decoupled from the rest of the globe and there will be collateral damage should a Brexit verdict triggers a selloff in emerging markets, which India is part of. The event would lead to a change in strategy for most money managers, shifting their preference from equity towards safe havens such as gold.
The intensity of the damage because of a possible Brexit could be high, but it will not be permanent. Most analysts expect a maximum of kneejerk reaction in the domestic market after which investors will return to the market once the dust settles.
"If there is a Brexit, risk-off trade will kick in, especially because of currency volatility. A risk-off trade may lead to some money going out of emerging markets, including India," said Sashi Krishnan, Chief Investment Officer, Birla Sun Life Insurance.
A weaker rupee can further erode returns for the foreign investors, making them to cash out of the domestic market.
"I would think going into the vote, people are reducing their exposure to emerging markets, but I think a lot of these fears will sort of even out after the event," he added.
Krishnan said any correction because of Brexit will be an opportunity to take exposure in domestic equities, especially the cyclical or consumption-related stocks.
Fund outflow is a risk:
Brexit will lead to capital outflows from India to a certain extent, said experts. Will that entirely damage the India story? No.
"A Brexit will also impact capital flows to India and our exports to Europe will get affected due to a weaker euro and pound. Indian business houses have a material presence in both UK and Europe, and they will see substantial impact due to unavoidable currency fluctuations," said Nirdosh Gaur, MD & CEO, Moneypalm.
Akash Prakash, CEO & MD, Amansa Capital said the biggest worry from a Brexit vote would be that it can open a real can of worms, raising a question mark over hoe the European Union will function in its new avatar.
"I think the real worry on Brexit is not so much about the impact on the UK, which is of course there, but is it about the possible beginning of disintegration of Europe, which is a much bigger worry," he added.
A 'Leave' vote would complicate matters for regional policymakers already wrestling with the euro zone's economic crisis. "These concerns are not limited to retail players as net redemptions from Europe equity funds YTD are now evenly split between retail and institutional investors," the report said.
The second week of June saw EPFR Global-tracked equity funds post a collective outflow of $3.6 billion while bond funds experienced net redemptions for the first time quarter to date. Over $22 billion flowed out of the money market funds, with the bulk getting redeemed on June 15.
